1. Tax Issues Chapter 9 Section 4

2. I. Tax Reform A.1980s 1.Reduction in number of income tax brackets 2.Lowering the highest marginal tax rate B.1990s -2000’s 1.Child tax credits 2.Addition of some additional upper brackets 3.Cuts to capital gains and estate taxes 4.Controversy: cuts that were made appeared to favor the wealthy

3. II. Ideas for change Current system is complicated Budget deficits require need for new revenue (unless cuts are made to spending) A.Value Added Tax – tax on the value added to a product at each stage of production (complicated sales tax) 1.Advantages Hard to avoid (everybody buys things) Incidence is widely spread Easy to collect 2.Disadvantages Not as visible Addition to state sales taxes

4. II. Ideas for change B.Flat Tax – proportional tax rate 1.Advantages Simplicity No loopholes Reduced cost in preparing and collecting taxes 2.Disadvantages No behavioral incentives Increases tax burden of low income earners Disagreement about what the appropriate rate should be